Role of Technology in Enabling Dynamic Virtual Enterprises - CiteSeerX

Role of Technology in Enabling Dynamic Virtual Enterprises Nitin Nayak1, Tian Chao1, Jenny Li1, Joris Mihaeli2, Raja Das3, Annap Derebail4, Jeff Soo Hoo4 1

IBM Watson Research Center, Yorktown Heights, NY 2 IBM Haifa Research Lab, Haifa, Israel 3 IBM Software Group, Raleigh, NC 4 IBM Global Services, Los Angeles, CA

Abstract It is widely accepted that the challenges posed by virtual enterprises are not necessarily technological in nature but more associated with the business issues in organizing and operating such organizations. However, solutions to these business issues can and should leverage the technological infrastructure in order to improve the feasibility, scalability and efficiency of this business model. This paper discusses our experiences in building such a technological infrastructure for supporting the creation, operation, and dissolution stages within the lifecycle of a virtual enterprise. The various business issues at each stage in the lifecycle are presented along with our approach to solving them with varying degrees of success. Keywords: Virtual Enterprise, Virtual Corporation, Dynamic e-Business, Collaborative Commerce, B2B emarkets

1. Introduction In today’s hyper-competitive business environment, companies cannot afford to be second-rate at anything. On the other hand, one cannot realistically expect them to be first-rate at everything either. Virtual enterprises allow the possibility of bringing together several organizations that are first-rate within their core capabilities thereby creating an organization that is overall first-rate. Virtual integration as opposed to vertical integration will be the foundation for a competitive business strategy in this century [1]. Most virtual enterprises referenced within business literature describe organizations that are built over time and last several years within the same relationships. Cisco Systems is one of the best-known examples of such a virtual enterprise where it focuses on developing new products and selling these products to customers while leaving everything else to its business partners. However,

within today’s high-speed economy, one can envision virtual enterprises that are rapidly created for the purposes of pursuing specific market opportunities and disbanded after the opportunity has been satisfied. This business model already exists within many project-oriented industries such as construction, consulting, commercial insurance, etc. that cater to customer requirements for nonstandard products and services. This general principle should also apply to other industries allowing businesses to respond rapidly to changing market conditions created by demand volatility and supply constraints or for rapidly developing new products within hyper-competitive industries with short product lifecycles such as the electronics industry. We describe dynamic virtual enterprises as transient organizations that are created to leverage the core capabilities of member companies for the purposes of satisfying specific market opportunities. After satisfying the market opportunity, this transient organization is disbanded or reformulated to pursue other market opportunities. The business issues involved in creating, operating, and dissolving such dynamic virtual enterprises pose significant challenges that can be addressed by technology to a certain extent. Technology is definitely required to improve the speed with which these virtual enterprises can be created and also for operating this business model on a large scale. However, business aspects relating to trust, improving collaborative behavior amongst members, reward sharing, etc. can be supported by technology only to a certain degree. This paper relates our experiences in building a technological infrastructure for supporting the creation, operation, and dissolution stages within the lifecycle of a virtual enterprise. The focus of this paper is mostly to highlight the various business issues at each stage in the lifecycle and to describe at a high-level our approach to solving these issues with varying degrees of success. Section 2 discusses our motivation and objectives. Section 3 briefly discusses the lifecycle model of dynamic virtual enterprises. Section 4 describes our understanding

of the relevant business issues and associated technological support related to creation, operation, and dissolution of dynamic virtual enterprises. Concluding remarks are in Section 5.

2. Motivation and Objectives Advances in software capabilities as well as industry standards have given a new life to the notion of dynamic e-business, which no longer remains a pipe dream. Evolving industry standards for web-services such XML1, SOAP2, UDDI3, WSDL4, etc. are the first steps towards making dynamic e-business feasible [2]. The recent electronic signature law passed by the United States Congress making electronic signature equivalent of a pen signature also encourages dynamic e-business by taking out some of the liability risk out of these transactions. As more solutions from various software vendors implement these industry standards, we believe that the stage will open up for the next generation of e-business: dynamic virtual enterprises. Our objective was to explore the business issues associated with the various stages in the lifecycle of dynamic virtual enterprises (creation, operation, and dissolution) and develop technological solutions to support them. We explored those issues that we considered critical to the success of this business model. However, it is very likely that we may have left out some that the reader may consider important. So what we present in this paper could be considered a good starting point for others to further explore this approach to conducting business. In this project, we partnered with government agencies, industry experts, and consultants who are wellversed in the principles of agile manufacturing. We also worked closely with an organization that currently operates a business network for creating virtual enterprises using a manual approach in order to pursue opportunities in fabrication and assembly. We believe that the real world experience of these partners have provided us a good understanding of the real issues that will determine the success or failure of this business model.

3. Lifecycle of a Dynamic Virtual Enterprise

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Extensible Markup Language (XML) for data portability Simple Object Access Protocol (SOAP) for remote invocation of applications over the internet 3 Universal Description, Discovery, and Integration (UDDI) registries provide the mechanism for companies to register their capabilities so others may find them and bind to their services over the web. 4 Web Services Definition Language (WSDL) for defining web services so they may be invoked using SOAP. 2

The lifecycle of a dynamic virtual enterprise can be thought of as being made of three stages: creation, operation, and dissolution. Figure 1 provides a conceptual view of dynamic virtual enterprise creation. On the left are listed the various role players (sponsoring agency, virtual industrial park site, market-maker, registered members, pre-certified companies, etc.) that to some extent impact this business model. The major responsibility of satisfying the customer requirements however, belongs to the market maker and the registered companies (selected from a pool of companies with pre-certified capabilities). On the other hand, the sponsoring agency and the virtual industrial park have a somewhat intangible role of improving the credibility and trust within the business network.

Sponsoring Agency

Economic Dev. Agency, Industry Associations, VCs

PowderedMetal Parts

Virtual Industrial Park (VIP)

AutomationMarket Place

Market-maker

PowderedMetal

Registered Members

B

Market Opportunity

AutomationHub.com

C F D A Automation Equipment

F E Parts

F Pre-Certified Companies

A

F C

A

B D

G E

D Coalition

Virtual Enterprise

Figure 1. Conceptual view of virtual enterprise formation

In our case, we focussed primarily on using dynamic virtual enterprises to satisfy customer requirements for non-standard products and services. Hence, any market opportunity placed by a customer requires domain expertise to create an appropriate team of registered members to work on the project. This domain expertise is provided by the market maker either through in-house staff or through registered domain experts. Figure 2 shows the steps that are involved in processing a customer requirement until a vendor or vendor group is selected for delivering the solution. The figure describes the process at a single level. Similar transactions can occur asynchronously at several levels when a project is partitioned into several sub-projects resulting in a multitiered virtual enterprise. The operation of the dynamic virtual enterprise is no different than any other project operation. To improve productivity, the project members need access to appropriate tools for collaboration as well as tools for project management, etc. These collaboration tools can be

Gather Eng. Requirements Cascading RFx Intelligent Q&A JSP State Machine Virus Protection Electronic Signature

Identify Capabilities Reqd. UDDI capability model Multi-attribute search Electronic Signature Learning Mechanism

Identify Vendors with Capabilities Multi-attribute search Learning Mechanism

Apply Preferences Customer & Vendors Preference Grammar Discussion Support LDAP support Access Control

Discussion Support LDAP support Access Control Electronic Signature Decision Support

Electronic Signature Collaborative Tools Delegation Support

Notify Vendors

Attend Bidder's Conference

Generate Proposal (Vendor Team)

Negotiate Proposal (Customer&Vendor)

Award Contract to Vendor/s

Figure 2. Process steps at each level in multi-tiered virtual enterprise creation (from customer requirements to vendor selection) and the associated technologies. provided by the market maker or by external Application Service Providers (ASPs). The dissolution of the dynamic virtual enterprise can result in either the project team disbanding and moving on to other opportunities or in some cases registering the dynamic virtual enterprise as a vendor organization and competing for other market opportunities. The dissolution step is also a checkpoint for collecting appropriate performance measures for the project and providing feedback on improving the operation of future dynamic virtual enterprises as well as individual companies within the project.

Virtual Enterprise Creation ♦

4. Business Issues in Dynamic Virtual Enterprises We explored several business issues associated with the various stages in the lifecycle of a dynamic virtual enterprise as well as other general business issues that affect the feasibility of this e-business model. The following sections discuss our understanding of the relevant issues and means of resolving them using technology.

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Vendor Capability Representation. This is one of the primary challenges for effective vendor search and project team formation. The traditional notion of using NAIC5 codes, Thomas Register, and SIC6 codes to register vendors are inadequate for the purposes of representing vendor capabilities in the context of dynamic virtual enterprise formation. Although the XML-based representation of vendor services in UDDI-registries is a good starting point, it will have to develop further still to represent vendor capabilities within dynamic virtual enterprises. Additionally, ontologies for representing vendor capabilities need to be supported by various industry associations in order to have a well-defined representation of these capabilities that are open standards. Customer Requirements for Complex Non-standard Products and Services. In situations where complementary standard products from several vendors are offered as a bundle, this is not an issue. However, when virtual enterprises are created for the

North American Industry Classification (NAIC) System Standard Industrial Classification (SIC) codes

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purpose of satisfying complex customer requirements (e.g. design and development of automated equipment for semi-conductor manufacturing operation), the requirements gathering process itself has a strong domain expertise component. The requirements gathering module should provide a front-end that can intelligently guide the user. Use of decision tree based logic can help in presenting the user with appropriate questions based on the user’s answers to previous questions as well as on domain knowledge. Additionally, the requirements gathering module should be flexible enough to accommodate changes to the questions and answers over time. A data-driven mechanism for presentation can help with this issue. Participant Preferences. The risk of dealing with strangers is usually quite high, especially in mission critical projects. In many cases, customers would prefer to deal with vendors with whom they have conducted business in the past or are familiar with. Besides a customer’s preferred vendor list, there are several other preferences that both customers and vendors would like to be respected when forming dynamic virtual enterprises. Many approaches to handling preferences involve selecting from prespecified set of options within a pre-determined preference list. However, when it comes to forming dynamic virtual enterprises, each vendor can be expected to have its own individual logic of preference representation. Appropriate preference grammar and a business rules engine is required in such cases to provide flexibility in supporting diverse user preferences. The preference grammar allows creation of any type of business rule that can be managed and executed outside the main body of the software. Multi-attribute Vendor Search. In most cases, the vendors will be selected based on several attributes such as capabilities, capacity, geography of operation, experience, quality ratings, etc. The search algorithm for finding appropriate vendors should therefore accommodate multiple attributes. For each attribute of the customer requirement that is matched with an appropriate vendor capability, the search result can be within a range of 0% (no-match) to 100% (perfect match). In most cases the available vendors will not have an exact match across all the attributes. In such cases, the search process should select vendors with the closest match across all attributes while taking into account the customer requirement for a minimum acceptable degree of match. Market Mechanism. For non-standard products and services, the most frequently used market mechanism is negotiation that involves Request for Proposal

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(RFP) or Request for Quote (RFQ). In certain situations ( for example, when government agencies are the customers) the RFP process can have special conditions such as anonymous bidding, free access to RFP database for all vendors, requirement to include minority vendors, etc. In the case of complex projects, the project may be partitioned into several sub-projects and each subproject could be placed in the market separately for bidding by vendors. This process of partitioning could happen several times at each level and a multi-level project hierarchy can emerge. In such cases, the notion of a cascaded RFP mechanism is important to manage the various RFPs and associated proposals of the multi-level project. Negotiation Support. Usually RFP and RFQ processes involve negotiation between the customer and vendors, between the primary vendor and the secondary vendors, etc. before the contract is awarded. These negotiations can involve any aspect of the deliverable such as price, content, delivery schedule, etc. Negotiation spaces are key to supporting efficient negotiations and bringing them to a speedy closure. Asynchronous collaboration technologies such as team rooms, threaded discussions, etc. are effective in negotiating across time zones, especially in today’s global economy. Since these negotiation spaces contain sensitive data, strict access control is required. Additionally, the ability to actively manage a user’s access-privileges is a required feature for most collaboration spaces. Vendor Selection. In most situations, the RFP response will consist of multiple vendor proposals. Selection of one or more vendor proposals using multiple criteria can be a challenge in even the simplest cases and so a decision support tool can be very useful. In many cases, Analytical Hierarchy Process (AHP) [3] can be applied to rank order the multiple vendor proposals. AHP weights each of the user selection criteria and then weights the various proposal alternatives against each of these criteria. The result is a rank ordering of proposals that takes into account both the importance of each criterion to the user as well as the comparative evaluation of all alternatives against each of the selection criteria.

Virtual Enterprise Operation ♦

Collaboration Tools for Improved Productivity. Once a virtual enterprise has been created to address a market opportunity, the focus then shifts to efficient operation of the project team. Improving the productivity of the project team requires seamless but secure access to collaborative tools such as team

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rooms, document repositories, team calendar schedule, instant messaging, etc. In addition to these general services, domain-specific services such as product lifecycle management tools, product design viewers, etc. will be required. Enabling Cross-enterprise Business Processes. Creating a dynamic virtual organization is one thing but operating it as a cohesive entity is another. This requires integration of business processes across multiple organizations similar to that within a vertically integrated organization. The use of XML for data portability has made this feasible as several software vendors open up their solutions to accept XML-based data inputs and provide XML-based data outputs. Several software vendors are providing solutions for managing both private business processes (intra-enterprise) as well as public business processes (inter-enterprise) thereby allowing integration of multi-enterprise business processes. Industry standards are also being actively developed such as the RosettaNet for electronics industry [4], eBXML for e-business processes, etc. The new Simple Object Access Protocol (SOAP) should allow applications within one enterprise to call applications within other enterprises thereby speeding up the automation of machine-to-machine interaction. The basic integration technology is available today and gradually finding its way into applications from various software vendors. However, widespread linking of business processes will require availability of low-cost e-hubs. These e-hubs should provide webbased services for securely transporting and accurately translating data across a variety of backend applications.

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General Business Issues ♦

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Virtual Enterprise Dissolution ♦

Performance Evaluation and Metrics. Prior to disbanding the project team, the team members should review the performance of the team as well as of their peers. The choice of appropriate performance measures as well as the ability to measure them has a major impact on improving the deliverables using this business model. These performance measures should cover various aspects of dynamic virtual enterprise creation and operation. Areas such as proposal quality, project team deliverable quality, collaborative behavior within the team, vendor performance, etc. are few of the important ones. Rating performance of both customers and vendors has become a fairly common practice amongst many e-businesses (e.g. eBAY). Peer rating, however, is open to gaming, especially when the number of peer reviews is small. Rating algorithms that discard the best and the worst rating in order to reduce the skew usually have better performance.

Other researchers claim that algorithms based on median score perform better than those based on averages. Improving Vendor’s Core Capabilities. As vendors change to marketing their capabilities instead of just products and services, they could benefit from information about areas where their capabilities are lacking or need further improvement. Business intelligence using various online analytical processing and data mining techniques can provide helpful insight into the vendor’s performance and areas for improvement. Such insight can result in vendors adding capabilities that they lack, improving capabilities that are weak in comparison to their competitors, or further capitalizing on their strengths.

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Business Risk. From the customer’s perspective there are several sources of risk including quality of vendor’s capabilities, delivery performance, financial solvency, vendor capacity, etc. From the vendor’s perspective also there are several concerns with the customer’s ability to pay being the primary one. Rating agencies such as Dunn & Bradstreet [5] and others have a key role to play in reducing such business risk by providing relevant financial and other information. In other cases, evaluation agencies for business processes, industry best practices, etc. can rate the performance and deliverables of vendors. In certain cases, especially when dealing with strangers, the use of digital signatures to sign rating forms can ensure that the reports are authentic. Accountability and Liability. Even within dynamic virtual enterprises, these issues are very similar to traditional notions of accountability and liability. In the case of multi-stage product lifecycle (e.g. new product design, rapid prototyping, production, end-oflife maintenance, etc.), these issues can be further complicated due to the possibility of using a different virtual enterprise for each stage of the product lifecycle. Accountability could be improved to some degree by having all parties digitally sign important documents such as RFPs, vendor proposals, contracts, etc. If at a future date there is repudiation challenge to any contractual obligation then the digitally signed document and its contents can be used to resolve such issues. Intellectual Property Ownership. The ownership of intellectual property can be a thorny issue when multiple organizations are collaborating together on projects. In cases where the project is partitioned into distinct sub-projects and assigned to single vendors, the issue could be simplified. But even in these cases, unless the intellectual property ownership issues are

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explicitly addressed at the beginning, it could lead to problems later on. Although this issue does not have a simple solution, work is ongoing amongst legal scholars to expand the legal framework to accommodate these new e-business models. Trust Building and Security. Most collaborative efforts require a certain degree of trust amongst the project members, especially when today many companies can be both competitors and business partners simultaneously. In dealing with trust issues, areas such as protection of intellectual assets and sensitive data, delivery performance and product quality of partners, etc. are extremely important. The use of strict access control to document repositories and establishment of an audit trail to log data access can improve system security and reduce chances of intellectual property leaching out to competitors. Additionally, the ability to expose certain parts of the document repository while protecting other parts is a required feature in many cases. Today, most important resources within an enterprise system can be protected using access control mechanisms although the effort required in installing and managing the access privileges can be significant. Government agencies and other sponsors such as industry associations can also play an important role in improving the trust within the business network. Steps such as pre-certification of companies, evaluation of company capabilities, establishing appropriate quality standards, etc. can go a long way in improving the level of trust within the business network and help in attracting market participants to this e-business model. Collaborative Behavior. Collaboration amongst participating vendors as well between vendors and customer is critical to proper functioning of this business model. Although the organization structure of the project team can be straightforward, the structure of the business network can be designed to facilitate collaborative behavior amongst the member companies. One such example is that of making each vendor also a shareholder within the e-marketplace. This way, even if a vendor loses a bid, they can still benefit from the overall income and shared dividends. The use of peer ratings can also strongly influence the level of collaboration within the business network. Both vendors and customers would be more willing to work with other vendors who have high ratings for collaboration. At the system level, collaboration requires the ability to securely exchange information between the various applications and business processes. However, before this becomes a common practice the benefits of information sharing will have to be clearly

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understood and in many instances the corporate management will have to specifically build a business strategy that encourages collaboration. Opportunity Sharing Rules. The main issue here is whether opportunities provided to vendors are purely market driven or whether operational policies within the business network control which vendors can bid on a certain customer project while still maintaining adequate competition. The objective of such rules could be varied including, preventing hypercompetition, providing few but high quality proposals to the customers, guaranteeing at least a minimum level of business to keep vendors actively engaged, etc. In situations where a business network has opportunity sharing policies, these should be easily accessible and understood by all participants. Additionally, the mechanism that enforces this policy should be secure and tamper-proof.

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Improving Sustainability of Market maker. Although many business networks could have the organizational structure of a vendor co-operative, the term marketmaker here refers to an independent establishment that is in the business of creating a market for nonstandard products and services in one or more industrial sectors. Today, the e-markets that primarily have a transaction-oriented business model based on brokering deals between customers and vendors (for either commodity or standard products and services) are finding that they do not provide adequate added value for creating a sustainable business. Since the interests of the market maker are important, especially for the existence of such an e-marketplace, the question becomes what are the sources of revenue available to the market maker. We believe that an e-marketplace that uses the dynamic virtual enterprise based e-business model for non-standard products and services provides several revenue opportunities for the market maker within any industry vertical. The fact that domain expertise is important to create dynamic virtual enterprises within such e-markets is an added value in itself that can yield profits. Additional sources of revenue can include providing collaborative services to dynamic virtual enterprises, providing business intelligence to vendors for improving their performance, providing vendor evaluation services and certification, etc. If viewed in this manner, the sustainability of a market maker practicing this e-business model should be better than the situation of e-markets today. Accessing Collaboration Tools. Project teams will need access to collaboration tools for working productively. In many cases, these collaboration tools

could be offered by Application Service Providers (ASPs), especially for general purpose collaboration tools such as document repositories, team rooms, discussion databases, product lifecycle management tools, project scheduling tools, etc. The virtual enterprise creation process should (1) provide a catalog of such collaboration tools to the project manager, (2) register the virtual enterprise users with the ASP so there is no requirement for the users to reregister, and (3) transfer the user’s access control privileges (established during the virtual enterprise creation) to the ASP so access can be granted to valid users of collaborative services. The users should also be provided a single sign-on feature so they do not have to re-login every time they access a collaborative service from their project portal.

5. Concluding Remarks The use of dynamic virtual enterprises that are created to pursue specific market opportunities is very relevant in today’s softening economy. Vendors with excess capacities could use this e-business model to partner with others on market opportunities in new industries or opportunities that they cannot pursue by themselves. Customers with huge investments in fixed capacity would be better off outsourcing their production needs to dynamic virtual enterprises comprising of specialized companies thereby converting fixed costs to variable costs based on consumption. Companies that have grown by mergers and acquisitions could create internal dynamic virtual enterprises out of their fragmented business units and appear as a cohesive single company to their customers. Although the technological infrastructure to support

this e-business model is available today and industry standards for collaborative commerce are gaining support everyday, most businesses will have to move past the current transaction-based e-commerce and develop strategy for collaborating with their business partners. This paper discusses several business issues that need to be resolved prior to widespread usage of this e-business model. Some industries such as construction, consulting, and commercial insurance that already do business using this approach will likely embrace this e-business model before others. Others in hyper-competitive, short product lifecycle situations should also find this e-business model appealing.

6. Acknowledgements The authors acknowledge the help of Sugato Bagchi and Kumar Bhaskaran from IBM Research; Hamid Bacha, from IBM Global Services; Ashish Mittal, Amaresh Rajasekharan, and Yasodhar Patnaik from IBM Global Services (India); Bill Adams, Ray Wallace, and Ken Walker from G5 Technologies.

7. References [1] Hammer, Michael, “Out of the Box: The Rise of the Virtual Enterprise”, Information Week Online, March 20, 2000. [2] “UDDI – Technical White Paper”, Publisher http://www.uddi.org, September 2000. [3] Saaty, T. L., "How to make a decision: The analytic hierarchy process", European Journal of Operational Research, Vol. 48, No. 1, pp. 9-26, 1990. [4] “RosettaNet Approved Standards for Partner Interface Processes (PIPs)”, RosettaNet – Lingua Franca for e-Business, Publisher http://www.rosettanet.org [5] “Technical Overview of the eccelerate.com Solution”, eccelerate.com, a company of the Dun & Bradstreet corporation.